Greek stocks up on reports creditor deal is close

Deal is seen crucial for Greece to avoid default

Head of the Institute of International Finance (IIF) Charles Dallara (L) and his colleague Jean Lemierre leave the Greek Prime minister's office in Athens January 20.

MADRID (MarketWatch) — Stocks rose sharply in Athens on Friday as several media reports said the country was close to clinching a deal with international creditors, who could be looking at a write down of 65% to 70% of the value of their holdings of Greek debt.

The Greece ASE Composite (GD) added 3% to 2,017.39 in late afternoon Europe trade, led by a 4.4% rise for National Bank of Greece SA
NBG, +5.60%
European stocks bounced nervously amid a scattering of news reports of progress in the talks, while bond yields for major euro-zone countries held largely steady.

Greek news website ekathimerini.com reported a fresh meeting between Greek Prime Minister Lucas Papademos and the head of the Institute of International Finance, Charles Dallara ended on Friday afternoon, and would resume at 7:30 p.m. local time.

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The IIF is representing private creditors who are being asked to take a loss on bondholdings, under the so-called private-sector involvement plan, known as PSI+. Greece must reach an agreement with them in order to get a the next tranche of bailout funds and avoid defaulting on a 14.5 billion euro ($18.74 billion) bond repayment in March.

Media reports out of Greece reported that the haircut on the Greek debt will reach around 65%, though others said as much as 70%, with an interest rate of 3.5% for new bonds.

“The new bond will likely have a 30-year maturity and a grace period of 10 years. It will have a stepped-up coupon structure which will average out in the area of 4 percent,” an official told Reuters.

Greece is pushing to wrap up a deal by Monday. Reuters reported that bankers and government officials close to the talks say a deal is close and a joint proposal may be presented at a euro-zone finance ministers meeting on Monday.

Talks broke down last week over the interest payment Greece must offer on new bonds.

At the same time, officials from the so-called troika of international auditors — the European Commission, the International Monetary Fund and the European Central Bank — were meeting with Greek officials on Friday to discuss reforms Greece needs to make in order to get a new financial bailout package.

A short-term fix to a long-term problem

Economists at Capital Economics said doubts remain over the impact a deal with bond-holders will end up having on Greece’s debts.

“For a start, whatever deal is “agreed,” it is still far from clear that enough bondholder will actually be prepared to take part,” said the economists in e-mailed comments. They said the calculated haircut assumes a participation rate of close to 100%, yet the IIF only represents 75% of private bondholders.

“At least some of the remainder are reported to be holders of credit default swaps who would be better off holding out for an involuntary default or “credit event,” which would actually trigger payment of their CDS,” they said.

And finally they said even if the IIF can get all bondholders on board with debt-swap deal, fiscal problems remain deep in Greece. “If, as we expect, Greece’s economy continues to under-perform the projections factored into its fiscal arithmetic, bigger haircuts, or a much higher debt ratio, or probably both, would appear to be very likely,” they said.

Papademos told the New York Times in an interview earlier this week that if the country doesn’t get full participation by bondholders in a debt-swap deal, his government may consider legislation that would force through private-sector haircuts.

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